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January 30, 2012

Ezrati, Golub See Flat Investment Year of Risk-On Trades: IMCA 2012

Opportunities remain in consumer-sector equities and corporate bonds

The markets may be braced for disaster in 2012, but while this year is expected to repeat 2011’s bleak performance, smart investors will seek opportunities in areas such as consumer-sector equities and corporate bonds, said Lord Abbett’s Milton Ezrati and UBS’ Jonathan Golub on Monday.

“The risk on trade is the best bet,” with stock dividend yields looking to produce higher returns than bond yields, said market strategist Ezrati (left) at the annual New York conference of the Investment Management Consultants Association, which drew 850 attendees at the Marriott Marquis on Times Square.

Golub, who sees “a huge disconnect” between the disaster-focused bond markets and the more upbeat stock markets, predicted that the global capital markets will continue to ride flat seas with occasional choppiness in 2012.

Still, there are investment opportunities in this environment, Golub said. He pointed to corporate bonds of companies whose balance sheets are “unbelievably delivered,” emerging-market equities and the Consumer Staples sector. Europe, on the other hand, is an investment to avoid, Golub said: “I think everyone on the planet is underweight Europe.”

As chief strategist for UBS, Golub sets a 2012 year-end price target for the S&P 500 stock index at 1,325–not much different than its current value of 1,310. This is based on an 11.9x forward P/E, built upon UBS’ projections of 2.0% U.S. GDP growth in 2012 and 2.6% growth in 2013.

In other words, investors are getting used to reduced expectations, Golub noted, while Ezrati said that the secular bull market of 1982 to 1999 is not going to come back any time soon.

“Readjusting expectations for this world is a very challenging thing,” Golub said. “It’s hard for people to look at their portfolio and wonder in this low-yield environment how they’re going to get to retirement.”

The two panelists agreed that the Federal Reserve is running out of tools to address stagnant growth in the United States, in light of the Fed’s zero-interest policy for the foreseeable future and GDP growth seemingly locked in a 2% to 2.5% range.

“Treasury yields at less than 2.0% are saying all you’re going to get from safety is safety,” Ezrati said.

The final takeaway? “We are in many respects in the same boat as last year,” Ezrati said. “A risk on trade is favored in this environment over a safe haven bet.”

According to a Lazard Asset Management fixed income report in 2009, “risk-on” periods–during which credit, commodities, and other reflation themes rallied–have consistently alternated with “risk-off” periods, during which U.S. Treasuries, the U.S. dollar, and other safe-haven asset classes benefited from a flight to safety.